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Gauging the short-term impact of the Black Sea conflict on grains and vegetable oil markets

06 Apr 2022

The ongoing Black Sea conflict has roiled many markets, including for grains and oilseeds (and products), where the Russian Federation and Ukraine collectively account for about 30 percent and 15 percent of global wheat and maize exports, respectively, and represent a combined share of around 80 percent of trade in sunflowerseed products.

With the disruption to Black Sea supplies fuelling worries about already tight exporter grain stocks, the IGC Grains and Oilseeds Index – a measure of movements in average export prices – reached its highest level on record in mid-March.

For sunflower oil, given suspended seaborne dispatches, Ukrainian fob prices are no longer freely quoted. Nevertheless, the impact on prices can be gleaned though trends at competing origins, with fob offers in Argentina rallying to all-time highs in recent weeks.

The spike in agricultural commodity prices has contributed to increased food security risks, especially in import-dependent countries in Near East Asia and Africa, where food costs account for a significant share of household expenses. Some of these importers saw poor crops last season, while many are still feeling the fallout from the coronavirus pandemic. Additionally, a surge in crude oil prices has pulled marine fuel values to record levels, inflating ocean delivery costs.

Ukraine was previously expected to export a combined 20 million tonnes of wheat and maize from late-February to the end of June 2022. However, with grain export options now limited to railway dispatches via the country’s western borders, shipments may reach only a fraction of that volume. Damage to port facilities, railroads and storage silos, which remains unknown, can potentially limit export capacity over the longer term. While the Russian Federation continues to ship grains from its Black Sea terminals, trade and logistics has been complicated by finance restrictions due to sanctions and difficulties securing vessels and freight insurance.

Due to tight availabilities of labour, fuel and fertilisers, as well as damaged fields and infrastructure, downside risks to Ukraine's 2022/23 grain and oilseed supplies are significant and could potentially lead to longer-term shortfalls in the global market. While some supply response is possible in other producers, inflated prices and limited availabilities of farm inputs, including fertilisers, could limit acreage and application rates, potentially affecting yields and crop quality.

Looking at possible nearby alternatives to Black Sea wheat supplies, India appears to be well-placed to step in, with ample local availabilities and competitive fob and freight prices. However, shipments from that origin will likely hinge on the country’s inland logistics capacity and government procurement plans. EU exporters could also provide additional volumes to the market, although some member states have already expressed concerns about possible supply shortfalls. In the US and Canada, high prices following disappointing harvests may limit the potential to absorb a significant shift in demand this season. As for Australia, despite large supplies following two record harvests, quickly ramping up volumes will likely be constrained by extremely tight nearby loading capacity, while in Argentina, accumulated export licenses are already close to the government’s annual cap. The situation also looks tight in the maize market, where exporter supplies are limited, especially outside of the US. Consequently, high commodity and freight prices could potentially result in demand rationing or increased use of domestic reserves, where possible, at least in the near-term.

Likewise in the case of sunflower oil, a net reduction in exportable supplies is envisaged, ultimately leaving importers with a choice between shifting a portion of their requirements to alternatives or reducing demand. The first option will not be straightforward. In addition to support from gains in sunflower oil values, markets for alternatives – namely palm oil, soybean oil and rapeseed/canola oil – are being underpinned by fundamentals. As the most abundantly traded, the obvious choice for consumers would be to secure additional quantities of palm oil. However, a recent upswing in buying interest has boosted prices, reportedly resulting in demand rationing. Additionally, significant biodiesel mandates in key exporters, most notably in Indonesia, may cap the potential for a sizeable expansion of exports.

In the case of soybean oil, too, record US domestic demand is linked to expanding utilisation for biofuels (renewable diesel) production, thereby capping exportable supplies. And with smaller 2021/22 southern hemisphere soybean harvests set to restrict availabilities for processing, shipments by Argentina – the world’s leading exporter – and Brazil may be constrained in coming months. Prospects for increased rapeseed/canola oil trade will be thwarted by tight supplies and record prices, tied to last year’s poor Canadian canola harvest.

Looking ahead, high prices are likely to elicit supply responses by both key exporters and importers of vegetable oils. However, it seems likely that, for the foreseeable future, buyers must be willing to pay more for less. On the policy front, the current situation confronting global vegetable oils markets has led to growing speculation that biofuel mandates could be scaled back or halted in some countries. However, such responses must be considered in the context of energy markets, with diversification now at the top of most national agendas.